RESPONSE TO HMRC CONSULTATION DOCUMENT: SECURITY FOR PAYE AND NICs

1 INTRODUCTION

1.1  The AAT is pleased to comment on the issues raised in the HMRC consultation document on “Security for PAYE and NICs”.

1.2  We have over 48,000 full and fellow members and 73,000 student and affiliate members worldwide. Of the full and fellow members, there are over 3,200 Members in Practice who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types.

1.3  We are a registered charity whose objects are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law.

1.4  In pursuance of those objects the AAT provides a membership body. We are participating in this consultation as part of our contribution towards the public benefit of achieving sound and effective administration of taxes. We also feel that the issues raised in this consultation paper will affect our members in practice, their clients and potentially the UK economy.

1.5  We wish to thank HMRC for the invitation to the consultation meeting with HMRC at the Treasury Offices on Horse Guards on 13 January 2011, which was attended by the AAT’s Technical Manager.

2 INTERESTS

2.1  We are participating in this consultation as part of our contribution towards the public benefit of achieving sound administration of the law.

3  COMMENTS

We would like to comment on the proposals in the consultation document using the following scenario:

a)
b)
c)
d)
e)
f)
g)
h)
i)
j) / The scenario is that two people (Mr Blue and Mr Red) run a business ABC limited. ABC Limited becomes insolvent with outstanding debts to:
·  HMRC for VAT
·  HMRC for PAYE/NI
·  employees for unpaid salaries
·  customers who have paid for goods and services in advance
·  other businesses that have supplied goods and services on credit
·  financial investors
·  their bank.
After ABC Limited has been struck off the Companies House register, Mr Blue and Mr Red decide to start a new venture and set up a new company called HIJ Limited.
As Mr Blue and Mr Red have a history of starting up new companies which subsequently become insolvent owing taxes that may never be recovered, HMRC decides that Mr Blue and Mr Red are what is commonly known as ‘phoenix traders’.
Quite rightly HMRC is increasingly exasperated by the actions of Mr Blue and Mr Red and decides to seek two financial securities for VAT and PAYE/NI from either Mr Blue, Mr Red or HIJ Limited.
The financial security effectively guarantees that if HIJ Limited becomes insolvent then there will be no outstanding tax, VAT or PAYE/NI, that is outstanding and payable to HMRC.
HMRC will effectively have secured a position as a ‘preferential creditor’.
At the consultation meeting on 13 January 2011 HMRC argued that it would not be a ‘preferential creditor’, and this is strictly true because at no time will HMRC ever be a creditor to HIJ Limited.
Currently, HMRC already obtains financial securities in respect of VAT. This consultation is seeking to introduce new legislative powers to enable HMRC to obtain financial securities in respect of PAYE/NI.
At no time will any other creditor be informed that HMRC holds financial securities from HIJ Limited. Therefore in the event that HIJ Limited becomes insolvent all the other honest employees and creditors will have a smaller share of the funds available for distribution.
Currently, where HMRC seeks financial securities for VAT it has advised on its website that it will not disclose the name of the person(s) and company because of the Data Protection Act. This means that HMRC is protecting the rights of individuals and their businesses that are viewed by HMRC as ‘phoenix traders’ and ‘phoenix businesses’ and HMRC is doing this to the detriment of honest employees and honest business creditors.

3.1  Using the above scenario, the AAT can understand why HMRC is seeking to obtain a financial security for PAYE/NI from the phoenix trader(s) and/or the phoenix company (HIJ Limited). However, the lack of public disclosure makes it appear that HMRC is only interested in advancing its short term financial interests to the detriment of honest employees and honest business creditors.

3.2  The lack of public disclosure also means that the deterrent effect on phoenix traders and phoenix businesses is significantly reduced. Without this deterrent effect phoenix traders will see insolvency as an easy way to evade their financial liabilities.

3.3  Phoenix traders and phoenix businesses should not have the right to anonymity and it goes against HMRC’s own policy of “Publishing the names of deliberate defaulters”.

3.4  Currently, HMRC is able to hold financial securities for VAT. In this respect the explanation on HMRC’s website of using the requirements of the Data Protection Act to protect the interests of phoenix traders and phoenix businesses over and above the interests of honest employees and business creditors would not make sense to the average person.

3.5  Therefore, the AAT would like to make the following three recommendations:

Recommendation 1

The AAT would recommend that HMRC creates a separate public register on the Companies House website containing the names of the individuals and the respective business names from where HMRC holds a security for each type of tax:

·  Value Added Tax (VAT)

·  Pay As You Earn (PAYE) and National Insurance Tax (NI).

If HMRC seeks to hold a security for any other type of tax in the future then HMRC should create an additional public register on the Companies House website.

The Tax Securities Registers should be kept by Companies House, who should have oversight of the Tax Securities Registers to make sure that HMRC is maintaining the information on the registers by providing correct and up to date information.

Access to the Tax Securities Registers should be free so that honest members of the public and honest businesses can readily refer to the register and protect themselves from the nefarious activities of phoenix traders and phoenix businesses.

Recommendation 2

Currently, HMRC can already require a financial security for VAT and the proposal in the consultation is to have the additional power to hold another security for PAYE and NICs.

This is a duplication of effort and costs for HMRC.

These duplication costs are unnecessary and will inevitably be passed to taxpayers and businesses.

At the consultation meeting HMRC stated they were completely different taxes and would have to be administered by different teams.

Please note that we have not argued that this may also be confusing for the businesses that are required to provide the financial securities, on the basis that these businesses are controlled by a person (or persons) who have previously defaulted on their tax liabilities.

The recent Government Spending Review and the cuts to HMRC’s budget would appear to be at odds with HMRC’s proposal to have different teams within HMRC looking after different financial securities for different taxes. This would result in a proliferation of different legislation which can only lead to an increase in costs to HMRC and ultimately to British businesses and taxpayers.

The AAT strongly believes that HMRC is a single government department and that it should only have one security which would cover all the taxes administered by HMRC. This would have the added advantage that HMRC would only have to maintain a single Tax Security Register per recommendation 1 above.

Recommendation 3

The legislation should specifically prohibit HMRC from seeking a financial security from a business where the proprietors have not previously operated a business that has become insolvent, leaving outstanding tax liabilities.

In cases where a business regularly delays or does not settle its tax liabilities on a timely basis then HMRC can exercise its powers to wind-up the business. There are press reports that illustrate the efficiency with which HMRC winds-up defaulting businesses[1].

Therefore, it would be inappropriate to give HMRC the powers to seek financial securities from an existing business where the proprietors have not previously defaulted, or been given a Fair Warning Notice (please refer to paragraph 3.28 – 3.30 below).

This would give HMRC an unfair advantage over honest employees and honest creditors as HMRC will, in effect, become a preferential creditor.

Potential impact on the economy

3.6  In paragraph 1.7 it states that “HMRC estimates that the Exchequer lost between £600 million to £800 million per year between 2005-06 and 2008-09 in PAYE and NICs debts that had been built up by employers who then became insolvent.”

3.7  At the consultation meeting HMRC suggested that they would only be looking for security in extreme circumstances and in very few cases.

3.8  The problem is that the legislation does not specify the extreme circumstances therefore HMRC could potentially seek security from the businesses of all the individuals who had previously defaulted, which could potentially reach £800 million.

3.9  The introduction of these financial securities would create a financial drive to increase the tax yield and reduce the loss of tax revenues from businesses becoming insolvent.

3.10  This financial driver would encourage HMRC to maximise the number of securities that it could obtain.

3.11  This would have an impact on the economy and act as a positive disincentive to individuals from starting up in business.

3.12  The AAT accepts HMRC’s current sincerity regarding only seeking financial securities in extreme circumstances. However, in the future the financial driver may prove to be too much of an incentive.

3.13  HMRC has to consider putting in safeguards to prevent the requirement for short-term financial securities from having a detrimental effect on the economy in the medium and long term. One safeguard could be to establish a definition of what is meant by “extreme circumstance” or develop an appropriate test for differentiating whether or not a particular case satisfies the test of being an “extreme circumstance”.

Which people should HMRC be seeking security from?

3.14  The draft Statutory Instrument refers to “Persons from whom security can be required”. The list of persons includes director, company secretary and any other similar officer.

3.15  HMRC may wish to consider including in this list:

·  shadow director

·  non-executive director

·  partner

·  trustee.

Employed members of the AAT

3.16  Many AAT members act as company secretary in an employed capacity. The AAT would like to think that the vast majority of AAT members are honest and would therefore not be caught by this legislation.

3.17  On the other hand the small minority who may not be so scrupulous should be caught by the legislation.

3.18  The legislation does not appear to differentiate between the honest and the not so scrupulous.

3.19  The AAT would like to see the legislation clarified so that HMRC staff are empowered and able to differentiate between the “honest” and the “not be so scrupulous”.

Licensed members of the AAT

3.20  The AAT also has licensed Members in Practice (MIPs) who act as company secretary for businesses where the MIP invoices the companies for the services he or she provides.

3.21  In these cases the MIPs are more remote from the respective businesses and it is even more unlikely that MIPs are party to the unscrupulous conduct of directors controlling the business.

3.22  The legislation does not take account of this scenario and therefore does not differentiate between the honest and the not so scrupulous company secretary who is not an employee of the business.

Safeguards and soft targets

3.23  The legislation appears to be subjective and leaves far too much to the discretion of HMRC staff in the determination of whom should be required to provide a financial security to HMRC.

3.24  The legislation needs to be more objective, which will give greater consistency to how the legislation is applied by HMRC staff.

Legal requirements for how the financial security should be shown in the annual accounts of private limited companies and public limited companies

3.25  It would be natural for a phoenix trader or phoenix company to want to cover up their nefarious past. In the accounts a phoenix company could simply show the financial security as a fixed asset in its Balance Sheet. Clearly, in the event the company becomes insolvent the crystallising event would result in this “fixed asset” becoming an expense in the Profit & Loss Account. This is clearly a nonsense which we have used to highlight the problem.

3.26  Therefore, the AAT believe that the Companies Acts should be amended so that the financial securities should be shown appropriately in the annual accounts of private limited companies and public limited companies that are submitted to Companies House.

3.27  Similarly, the company should be required to disclose the financial security on all of its corporate stationery.

Fair warning being given to the phoenix traders

3.28  We believe that when a business becomes insolvent it is at this time that HMRC should advise the partner or director that in the event that they start up a new business then they will be required to provide HMRC with a financial security.

3.29  Using the scenario above, it would be appropriate for HMRC to warn Mr Blue and Mr Red that they will be required to provide HMRC with a financial security when ABC Limited becomes insolvent. At this point in time a Fair Warning Notice should be served upon Mr Blue and Mr Red.

3.30  It would be unfair for HMRC to advise Mr Blue and Mr Red that they will be required to provide HMRC with a financial security after they have set up HIJ Limited. Because if Mr Blue and Mr Red had been given fair warning then they may not have set up HIJ Limited.

Care and support employers

3.31  In paragraph 97O (d) of the Statutory Instrument it refers to “care and support employers”. The Statutory Instrument does not mention where we could find regulation 206(4) so it was difficult for us to check which organisations this clause is intending to exclude. If this clause includes organisations such as care homes for example then we would comment that personal experience suggests that this type of organisation does not merit specific exclusion from these provisions.